Trade ministry proposes law revisions to put electricity prices under market mechanism

Regulations on a mechanism for adjusting retail electricity prices should be amended to move them closer to market prices, said the Vietnamese Ministry of Industry and Trade.

In a recent proposal submitted to the government on amendments to the Electricity Law, the ministry (MoIT) said it is the first time changes to the law have been proposed after nearly 20 years, with the aim of meeting the goals of developing the electricity industry and ensuring national energy security.

Under the proposal, policies that need to be revised include planning and investment in electricity development to ensure energy security; regulations on operating conditions and the granting and revocation of electricity generation permits; and managing electricity purchases and sales towards promoting a transparent competitive market with prices under a market mechanism.

The revised law should include regulations on system operation management, encouraging economical use of electricity, and increasing solutions to manage electricity demand and adjust electricity loads, said the MoIT.

Regarding electricity prices under the market mechanism, the MoIT said they were stated in the current law and implemented under the Prime Minister's Decision 24/2017. But in fact, price adjustments still face many difficulties due to public pressure.

“We need an overall review because each change can affect the macro-economy,” the ministry noted.

Since 2017, electricity prices have been adjusted three times, up 6.08% in 2017, 8.36% in 2019, and 3% in May 2023. According to Decision 24, the average retail power price is considered for adjustment every six months on the basis of correctly and fully calculating input costs for the industry’s production and business.

Data released by the state utility Vietnam Electricity (EVN) shows that in 2022, the group recorded a loss of more than VND36.2 trillion ($1.53 billion) from electricity production and trading, meaning VND149.5 (0.63 U.S. cents) for every kWh of electricity sold to customers. Thanks to income from other activities and cost reductions, its loss dropped to over VND26.2 trillion ($1.1 billion).

Experts said that due to the loss, EVN will be not able to reinvest in expanding its network and pay for electricity sales units, leading to power supply security risks.

The government should issue a decree on the authority to adjust power prices, instead of the current decision, in which the authority belongs to the government or EVN, said the ministry.

According to the MoIT, to attract private investment in power generation, EVN has negotiated and signed power purchase agreements with independent power producer (IPP) and build-operate-transfer (BOT) projects with an Internal Rate of Return (IRR) of 10-12%. This rate is higher than that applied to EVN-owned power generation units, which is usually 3% or less.

Therefore, the law amendment should add regulations on the electricity price policy to gradually reduce and then remove cross-offsetting between customer groups and regions, the MoIT said, adding that it will work with the Ministry of Finance to develop regulations related to electricity prices and a "retail price adjustment mechanism" in accordance with the provisions of the revised Law on Prices.

The ministry also proposed improvements to regulations on the electricity market, such as direct power purchase deals between major electricity users and generators with priority given to renewable power; identifying the rights and obligations of electricity market transaction operators; and competitive electricity market participants.

The draft revised Electricity Law is expected to be submitted to the National Assembly, Vietnam's highest legislative body, for comments at its session in late 2024, before approval in 2025.